Policy: Derivatives risk management

Purpose

This Derivatives Risk Management Policy documents all cases where the University has exposure to derivatives through external managers acting under a mandate from the University or through collective investments, or through investments directly held by the University.

Overview

The University’s investment objectives and strategies have been formulated and are contained in the Investment Policy. This document contains the asset allocation ranges and relevant statement in respect of the use of derivatives.

Scope

This Policy applies to all funds held in the University’s investment Portfolio.

Policy statement

Objectives and considerations

The University is a long term investor and considers the following objectives when considering the use of derivatives:

Derivatives are an integral part of the implementation of the investment strategy and may be used for, but not limited to:

Hedging – to protect an asset or cash flow against fluctuations in market value or foreign currency exposures; and

Approach to derivative risk management

The Council, through its Finance Committee, approaches derivative risk management in the following manner:

Where allowed by their mandates, or relevant fund documentation for pooled investments, external asset managers are permitted to use futures, options and other derivative instruments to assist with the effective management of the portfolio of assets;

Investment with each external manager is made after due consideration of each product’s Information Memorandum/Prospectus. The University through its Finance Committee has also given consideration to the relevant Derivative Risk Statements (DRS) supplied for each investment;

Regular monitoring of each manager’s compliance with its DRS is also undertaken. The University however, is aware that the adequacy of systems and procedures alone are not guarantees against the risks of derivative exposures. The integrity and skill of the manager are also important in managing these risks. The University considers a manager’s level of integrity and investment skill before appointing a manager and regularly reviews these factors throughout the terms of its appointment.

Directly held investments including listed infrastructure, Australian Investment Trusts and fixed income limit capital loss through the use of futures. Derivatives are not utilised in respect to the other directly held investments: Cash accounts used to meet day-to-day requirements; and Term Deposits.

Implementation

Appropriate contracts (such as ISDA Master Agreements and an associated Credit Support Annex) must exist between the manager and counterparties.

Non “over-the-counter” derivatives are traded on an exchange which is a licensed central counterparty that guarantees the financial settlement obligations of the exchange traded contracts.

Derivatives are valued using a mark-to-market methodology by the custodian. Revaluations are undertaken on a daily basis. All derivative positions are covered by collateral in the form of cash or cash equivalent.

External asset managers may be permitted to use derivatives consistent with the investment mandate given. These are specified in the agreement with each appointed manager. The total market value of the mandate assets plus the total market exposure of the derivatives held do not exceed the total market value of the mandate portfolio. Leverage is not permitted.

Each manager granted the use of derivatives in the implantation of the mandate provide the University with an audited Derivative Risk Statement on an annual basis. Each manager provides the University with a copy of its current derivatives usage policy and to certify that the derivative exposures managed conform to their policy.

Review of this policy

This policy will be reviewed at least annually by the Finance Committee or more frequently if:

Meaningful change is made to the investment selection process;

Relevant legislation or regulation requirements change.

When required, the Corporate Governance and Risk Office will audit and report to the Audit and Risk Management Committee and the Finance Committee on the appropriateness of, and compliance with, this policy.

Delegations relevant to this policy

346: Buy, sell and subscribe for Cth Bonds and Treasury: Up to $250,000 for Student Managed Fund.

348: Place/withdraw investments in negotiable certificates of deposit and interest-bearing bank deposits: Up to $500,000 for Student Managed Fund.

Information

This Derivatives Risk Management Policy documents all cases where the University has exposure to derivatives through external managers acting under a mandate from the University or through collective investments, or through investments directly held by the University.